Panama Papers And Greece

400 journalists belonging to the International Consortium of Investigative Journalists (ICIJ) are reviewing 2,6 terabytes of data to track billions held in shell companies over almost 40 years. Every first and last name showing up among the data is automatically criminalized. Sensational news have already come out such as: the clique around President Putin is not perfectly flawless; Russian oligarchs have not necessarily built up all their wealth in an honest way; a FIFA executive may have been involved in corrupt deals; etc.

I have written extensively about anonymous offshore companies with regard to Greece. One such article is here. Mossfon, the Panamanian company whose records were hacked, is only one of very many players in the market for shell companies in tax havens. This article from The Economist of April 7, 2012 gives a rather good overview.

As one might surmise, there are shell companies and there are shell companies. There is hardly an Annual Report of an international corporation which doesn't list several shell companies under the section "ownership in subsidiaries". At the same time, there is probably not one single shady politician or businessman in the entire world who does not own a shell company somewhere.

I asked a friend of mine, an oil & gas lawyer in Texas, for his views on shell companies because he has extensive experience with them: virtually every project he manages is housed in one (or more) shell companies. And yet - they are all legitimate business ventures (saving taxes in a legal way is legitimate!). Here is his reply:

* Using offshore entities is the only intelligent way to invest abroad.

* First, you want to ring fence. If I have two concessions in Colombia, I set up two different Cayman Island entities. Each will hold a concession, either directly, or through a Colombian wholly owned entity. If I get in trouble with the Colombian government on one concession, I don’t want that trouble to bleed over to the other one.

* Many countries, like the U.S., have a tax imposed on the gain on the sale of stock.  If I sell the stock of my Colombian company to Exxon, I pay Colombian tax on any gain. If I sell the shares of my Cayman Island company, I pay no such tax.

* I may want to give my key employees incentives and bonus. If I do that through the Colombian entities, they have to pay tax on the income.

* Another reason is that no one likes the U.S. or U.K. law. I had a client who had a Delaware entity own its portion of two supergiant offshore Indonesian fields. After 30 years he decided to sell it, and the purchaser was English. The purchaser was scared to death of owning a U.S. company with all the chance of litigation and taxation in the U.S. even though the asset had nothing to do with the U.S. So a nanosecond after the purchase was done, the U.S. entity was redomiciled to the British Virgin Islands.

* To open up an entity is extremely expensive and time consuming. Our law firm went through all the traps. I had to give my passport, driver’s license, bar card, and utility statements. And then they checked the databanks to be sure that I was whom I thought. They had a local law firm come out to meet me in person to compare my picture to what I was giving them. Of course, once you go through that, you wouldn’t change law firms for the cost of going through that again.

* My client was a U.S. hedge fund. They checked out the principals up side and center. And anyone that was a director or had signing authority had to go through the same process I did.

* The law firm we used was U.K. based. My contact was an Eton and Oxford lawyer. He was out of Dubai (where I met him once) and he handled Cayman Islands accounts. 

* And when we opened a bank account, it was in the U.S. or London. We had to go through all the Patriot Act protocol to establish the source of funds.

* There was no tax advantage to this. When a U.S. company owns more than 50 percent of an offshore entity, the U.S. regards the entity as a controlled foreign corporation.

* Other countries don’t tax income earned outside the country. So a Bulgarian can own a Colombian entity and not pay Bulgarian tax on any income – or on income on interest on fund legally held abroad. So for them, having it a Cayman Islands entity rather than a Bulgarian entity makes sense.

As a lawyer, I’m furious that a hacker can take 2.3 terabytes of data, give it to one newspaper, which in turn spreads it around 100 newspapers, each of whom has lots of folks looking at it – all with impunity. My social security number, my passport, my driver’s license, my picture – everything that an identity thief needs – would be in front of those people. And I have no recourse. Is that supposed to be legal as well? I never opened an account with Mossack Fonseca. But if I had and I came across one of the Suddeutsche Zeitung reporters who had my data, I’d take out my gun and ...

So much for shell companies which are used in the context of legitimate businesses. For example, I would be surprised if any Greek shipowner owned a ship which is not housed in a shell company somewhere. Does that make it illegitimate? Absolutely not! Only when the beneficial owners of shell companies take pains to hide their identity can one assume that there is a likelihood of something illegitimate in the shell company.

It is perfectly legitimate for a Greek to transfer his assets abroad, particularly if he is worried about political stability in Greece and/or currency devaluation. The two questions are: is the source of this wealth legitimate and is the revenue on it taxed properly? My understanding is that Greek tax laws are rather clear about this: Greeks have to declare all their world-wide assets on the tax return as well as the income earned on them. If the purpose of the shell company is to hide one of the two (or rather: both), then one is safe to assume that there is something illegitimate.

As a matter of rule: no one takes major steps to hide something if it is legitimate.